From a holiday retreat to a buy-to-let property, there are lots of reasons why you might buy a second home. But buying, owning, and selling an additional property in the UK will affect how much tax you have to pay.
The stamp duty land tax surcharge – a large tax you pay on the purchase – is the most significant cost when buying a second home. And, if you sell the property, you may have to pay capital gains tax, too.
Importantly, some tax implications will depend on what you use your second home for. For example, if it’s a rental property or furnished holiday home, you’ll need to pay income tax on any profits.
Here we’ll talk you through everything you need to know about the UK tax implications of buying a second home.
What is a second home?
In the UK, a second home is any other property you own alongside your main residence – the place where you actually live and spend most of your time.
No matter what you use the property for or how you came to own it, your second home will almost always be liable to extra tax charges. That includes all of the following:
- It’s a weekend retreat. Perhaps you work in the city and want a place to relax in the country during weekends and holidays. That’s a second home if you already own a property.
- It’s a seasonal or short-term let. You could buy a secondary residence to turn it into a holiday letting or Airbnb. If it’s available to holidaymakers for 210 days a year, it’s classed as a business and will have specific tax implications.
- It’s a buy-to-let. If you buy an additional property to let it out to residential tenants, it’s still classed as a secondary residence. That means extra taxes apply.
- It’s an investment. You can buy additional properties as long-term investments. Then, when house prices rise, you can sell for a profit. Watch out, though, because you’ll be taxed on the profits you make on the sale – more on that below.
- You’re an “accidental landlord”. Say you want to move house, but you’re struggling to sell your old place. Instead, you might decide to rent the old place out. Your new home will still be classed as a secondary residence and liable for stamp duty. But you can get a refund if you sell the old place within three years. You can also nominate your new home to be your main residence – but you have to do this within 2 years. This won’t affect the amount of stamp duty you have to pay upfront, but again, you can ask for a refund if you sell your old home within three years.
- Your partner owns property. Even if you don’t already own property yourself, a new home is still classed as a secondary residence if someone you’re buying with does.
What are the tax implications of buying a second home?
When buying a second home in the UK, the most significant tax implication is the Stamp Duty Land Tax surcharge.
Stamp duty is a tax on property purchases. It has different names and is charged at different rates depending on where you are in the UK. No matter where you are, though, for additional properties, there is always an extra charge. That’s the stamp duty surcharge.
With stamp duty, in all regions of the UK, the amount you pay depends on the property’s value. Work out how much you could owe with our stamp duty calculator.
Stamp Duty Land Tax
In England and Northern Ireland, Stamp Duty Land Tax is paid when you purchase a property. On your main residence, you pay:
- Up to £125,000 – 0%
- £125,001 to £250,000 – 2%
- £250,001 to £925,000 – 5%
- £925,001 to £1.5 million – 10%
- Above £1.5 million – 12%
Then for an additional property, there’s a surcharge of 3% on top of the standard rates. So, if you buy a second home worth £300,000, you pay 3% on the value up to £125,000, 5% on the next £125,000, and 8% on the remaining £50,000.
Compared to £5,000 on your main residence, you’d pay £14,000 on your second home.
Scottish Land and Buildings Transaction Tax (LBTT)
In Scotland, stamp duty is known as the Land and Buildings Transaction Tax (LBTT). The bands are slightly different to those in England:
- £0 to £145,000 – 0%
- £145,001 to £250,000 – 2%
- £250,001 to £325,000 – 5%
- £325,001 to £750,000 – 10%
- Above £750,001 – 12%
If you’re buying a second property, though, you’ll have to pay the Additional Dwelling Supplement. This is a 4% surcharge on the total value of the property.
So, if you’re buying a £300,000 second home in Scotland, you’ll pay nothing on the first £145,000, but 2% on the next £105,000, and 5% on £50,000. Then you’ll need to pay 4% of the total £300,000. This adds up to £16,600, compared to £4,600 on your primary residence.
You can use the Scottish Government’s property tax calculator to figure out how much you owe.
Welsh Land Transaction Tax (LTT)
Again, the tax on property purchases is different in Wales, where stamp duty has been replaced by Land Transaction Tax (LTT).
On your first property, you pay the following rates:
- £0 to £180,000 – 0%
- £180,001 to £250,000 – 3.5%
- £250,001 to £400,000 – 5%
- £400,001 to £750,000 – 7.5%
- £750,001 to £1.5 million – 10%
- £1.5 million and above – 12%
But on second homes, you’ll pay a 4% surcharge on each of the relevant bands. So, if the £300,000 second home you buy is in Wales, you’ll pay 4% on the first £180,000, 7.5% on the next £70,000, and 8% on the remaining £50,000.
That adds up to £16,950 on a second home, compared to £4,950 on a main residence.
Check out the Welsh Government’s LTT calculator to work out how much you will owe.
Do I have to pay stamp duty if I have a house abroad?
Yes, even if you have a property in a different country, you will have to pay the stamp duty surcharge.
How do I avoid paying tax on a second home?
There’s no reliable way to avoid paying tax on your second home in the UK. But there are certain circumstances in which you won’t have to pay stamp duty:
- Buy a property worth less than £40,000. In England and Northern Ireland, you won’t pay stamp duty on a second home if it’s worth less than £40,000.
- Buy a houseboat, caravan, or mobile home. These types of properties are not charged stamp duty.
- Put the property in someone else’s name. By making sure your name isn’t on the deed, the property won’t strictly be defined as an additional property. You could, for example, gift your child the money for the deposit – or become a guarantor for someone else’s mortgage.
- Sell your main residence within three years of buying a second home. In this case, you can get a stamp duty refund.
Owning a second home: tax you’ll need to pay
With a second home, you won’t only have to pay taxes when you buy and sell. You’ll need to consider a few other taxes on your property, too.
If you own two properties, you’ll have to pay council tax on both, but there won’t be an extra charge on your second home. Instead, some councils actually offer you a discount if you don't live in the second property all year round.
This policy changes from council to council, so check with them directly.
If you make money from your second property by renting it out, you will need to pay tax on that income. This works in the same way as with all your other income. Watch out, though, because your rental income can push you into a higher tax rate, where you’ll pay more.
Depending on what you use your second home for, you can reduce the amount of tax you can owe in two ways:
- Turn your second home into a “furnished holiday let”. If a holiday home is available for rent for at least 210 days a year, it’s classed as a business. As a result, you can deduct all the expenses relevant to the property – including furniture and the interest on your mortgage – from your rental income before you pay any tax.
This way, you get 155 days to enjoy your second home while decreasing your tax bill.
- Get tax relief on a buy-to-let. If you let a residential property, you can claim tax relief on the interest on your mortgage repayments. Before April 2020, this tax relief used to be at the marginal rate. Now, it’s limited to the basic rate of tax, meaning it might not be as beneficial for higher earners as it once was.
What are the tax implications when selling a second home?
Selling your second home also has important tax implications. Specifically, you’ll need to pay capital gains tax. Let’s talk about that in detail:
What is capital gains tax (CGT)?
Capital Gains Tax is a tax you pay on the sale of a property or investment. It’s only charged on any profit you make on the property, not the full amount of the sale. People who sell their primary residence do not need to pay CGT.
The amount of CGT you pay depends on how much you earn, as it’s linked to your income tax band. When calculating how much you owe, add the profit to your annual earnings. On the taxable profit in the basic tax rate, you pay 18% pax. Above that, you pay 28%.
Let’s look at an example:
- Look at your sale profit. A decade ago, you bought a house for £200,000, and you’re about to sell it for £300,000. That means you have a profit of £100,000, which you need to pay CGT on.
- Deduct expenses. Before you calculate what you owe, you can deduct any costs related to the sale from the profit. For example, estate agent or solicitor fees. If you paid them £2,700, your taxable profit becomes £97,300.
- Remember your CGT allowance. In the UK, everyone has a CGT allowance of £12,300 a year, which you don’t need to pay CGT on. So in this case, you only owe CGT on the remaining £85,000.
- Add the profit to your earnings. If you earn £30,000, you’re in the basic tax rate. But the £85,000 you make from the property sale will take you over the threshold of £50,270 and into the next tax band. That means you’ll pay 18% tax on the first £20,270 of your sale and 28% on the remaining £64,730.
- Calculate the total. In total, you will need to pay £21,773 in CGT.
Buying a second home? Talk to Habito
There can be a lot to think about when buying a home. And that’s no different when buying a second home.
At Habito, we can help make everything that much easier. Chat to one of our expert mortgage brokers to get started.